What is Non Banking Financial Company (NBFC)

In this article, I have tried to cover important questions relating to Non Banking Financial Company (NBFC) in question and answer mode. I hope you grab and increase your knowledge by reading this article. Article  explains What is a Non Banking Financial Company (NBFC), Are there different types of Non Banking Financial Company (NBFC), Does the Reserve Bank regulate all financial companies, What are returns and/or compliances which are to be done by Non Banking Financial Companies (NBFC), Can a Non Banking Financial Companies (NBFC) transfer its securities freely and Are Banks and Non Banking Financial Companies (NBFC) are similar?

What is a Non Banking Financial Company (NBFC)?

A Non Banking Financial Company (NBFC) is a company registered under the Companies Act, 2013 of India, engaged in the business of loans and advances, acquisition of shares, stock, bonds, hire-purchase insurance business or chit-fund business, but does not include any institution whose principal business is that of agriculture, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.

The working and operations of NBFCs are regulated by the Reserve Bank of India (RBI) within the framework of the Reserve Bank of India Act, 1934

As banks are not able to reach every corner of financial business needs in India, Non Banking Financial Company (NBFC) plays a very vital role in financial sector of Indian economy. That’s is why, since last few years in Indian economy is going down due to collapse of financial companies in India.

Are there different types of Non Banking Financial Company (NBFC)?

Yes, there are various types of Non Banking Financial Company (NBFC). NBFCs are categorized a) in terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs, b) non deposit taking NBFCs by their size into systemically important and other non-deposit holding companies (NBFC-NDSI and NBFC-ND) and c) by the kind of activity they conduct.

Now let us discuss, different types of Non Banking Financial Company (NBFC) in India regulated by Reserve Bank of India (RBI) within these broad categories:-

1. Asset Finance Company (AFC) : An AFC is a company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive/economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate of financing real/physical assets supporting economic activity and income arising therefrom is not less than 60% of its total assets and total income respectively.

2. Investment Company (IC) : IC means any company which is a financial institution carrying on as its principal business the acquisition of securities.

3. Loan Company (LC): LC means any company which is a financial institution carrying on as its principal business the providing of finance whether by making loans or advances or otherwise for any activity other than its own but does not include an Asset Finance Company.

4. Infrastructure Finance Company (IFC): IFC is a non-banking finance company a) which deploys at least 75 per cent of its total assets in infrastructure loans, b) has a minimum Net Owned Funds of ₹ 300 crore, c) has a minimum credit rating of ‘A ‘or equivalent d) and a CRAR of 15%.

5. Systemically Important Core Investment Company (CIC-ND-SI): CIC-ND-SI is an NBFC carrying on the business of acquisition of shares and securities which satisfies the following conditions:-

(a) it holds not less than 90% of its Total Assets in the form of investment in equity shares, preference shares, debt or loans in group companies;

(b) its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its Total Assets;

(c) it does not trade in its investments in shares, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment;

(d) it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the RBI act, 1934 except investment in bank deposits, money market instruments, government securities, loans to and investments in debt issuances of group companies or guarantees issued on behalf of group companies.

(e) Its asset size is ₹ 100 crore or above and

(f) It accepts public funds.

6. Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC) : IDF-NBFC is a company registered as NBFC to facilitate the flow of long term debt into infrastructure projects. IDF-NBFC raise resources through issue of Rupee or Dollar denominated bonds of minimum 5 year maturity. Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.

7. Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI): NBFC-MFI is a non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets which satisfy the following criteria:

1. loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding ₹ 1,00,000 or urban and semi-urban household income not exceeding ₹ 1,60,000;

2. loan amount does not exceed ₹ 50,000 in the first cycle and ₹ 1,00,000 in subsequent cycles;

3. total indebtedness of the borrower does not exceed ₹ 1,00,000;

4. tenure of the loan not to be less than 24 months for loan amount in excess of ₹ 15,000 with prepayment without penalty;

5. loan to be extended without collateral;

6. aggregate amount of loans, given for income generation, is not less than 50 per cent of the total loans given by the MFIs;

7. loan is repayable on weekly, fortnightly or monthly instalments at the choice of the borrower.

8. Non-Banking Financial Company – Factors (NBFC-Factors): NBFC-Factor is a non-deposit taking NBFC engaged in the principal business of factoring. The financial assets in the factoring business should constitute at least 50 percent of its total assets and its income derived from factoring business should not be less than 50 percent of its gross income.

9. Mortgage Guarantee Companies (MGC) – MGC are financial institutions for which at least 90% of the business turnover is mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business and net owned fund is ₹ 100 crore.

10. NBFC- Non-Operative Financial Holding Company (NOFHC) is financial institution through which promoter / promoter groups will be permitted to set up a new bank .It’s a wholly-owned Non-Operative Financial Holding Company (NOFHC) which will hold the bank as well as all other financial services companies regulated by RBI or other financial sector regulators, to the extent permissible under the applicable regulatory prescriptions.

It is mandatory for any company who are juggling to start above said to business of the company, to get registered and acquire Certificate of Registration from Reserve Bank of India. the Reserve Bank can impose penalty or fine on them or can even prosecute them in a court of law for not complying with.

How apply for certificate of registration for a Non Banking Financial Company (NBFC)?

The applicant company is required to apply online and submit a physical copy of the application along with the necessary documents to the Regional Office of the Reserve Bank of India. The application can be submitted online by accessing RBI’s secured website https://cosmos.rbi.org.in

Does the Reserve Bank regulate all financial companies?

 No. Housing Finance Companies, Merchant Banking Companies, Stock Exchanges, Companies engaged in the business of stock-broking/sub-broking, Venture Capital Fund Companies, Nidhi Companies, Insurance companies and Chit Fund Companies are NBFCs but they have been exempted from the requirement of registration under Section 45-IA of the RBI Act, 1934 subject to certain conditions.

Housing Finance Companies are regulated by National Housing Bank, Merchant Banker/Venture Capital Fund Company/stock-exchanges/stock brokers/sub-brokers are regulated by Securities and Exchange Board of India, and Insurance companies are regulated by Insurance Regulatory and Development Authority. Similarly, Chit Fund Companies are regulated by the respective State Governments and Nidhi Companies are regulated by Ministry of Corporate Affairs, Government of India. Companies that do financial business but are regulated by other regulators are given specific exemption by the Reserve Bank from its regulatory requirements for avoiding duality of regulation.

What are returns and/or compliances which are to be done by Non Banking Financial Companies (NBFC)?

Apart from the compliances under the Companies Act, 2013 and other applicable laws, NBFC company need to submit the below given returns:-

1. NBS-1 Quarterly Returns on deposits

2. NBS-2 Quarterly return on Prudential Norms is required to be submitted by NBFC accepting public deposits

3. NBS-3 Quarterly return on Liquid Assets by deposit taking NBFC.

4. NBS-6 Monthly return on exposure to capital market by deposit taking NBFC with total assets of ₹ 100 crore and above.

5. Half-yearly ALM return by NBFC holding public deposits of more than ₹ 20 crore or asset size of more than ₹ 100 crore

Audited Balance sheet and Auditor’s Report by NBFC accepting public deposits.

Can a Non Banking Financial Companies (NBFC) transfer its securities freely?

 Subject to restriction to private companies under the Companies Act, 2013. And complying of provisions of transfer of securities by Private and public companies, a Non Banking Financial Companies (NBFC) is required to take prior approval from the Reserve Bank of India, where any transfer/ acquisition of shareholding is 26% or more.

Are Banks and Non Banking Financial Companies (NBFC) are similar?

 NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:

a) NBFC cannot accept demand deposits;

b) NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;

c) deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

Disclaimer:  The above article briefs the important questions related to Non Banking Financial Companies in India regulated by Reserve Bank of India and is purely for informational purpose. In no case, the author shall not liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.

(The Author is Corporate Consultant and provides varied array of services including Start-ups, Secretarial, Legal, Intellectual property, taxation, Audit, GST, Book keeping and other ancillary advisory service in Delhi, Chandigarh as well as The National Capital Region (NCR) and can be contacted through mail:- [email protected])